For the seventh time in 5 years, the Federal Housing Administration (FHA) raised its mortgage insurance premium (MIP) schedule for FHA-insured borrowers on April 1, 2013. As of June 3, HUD revised the FHA minimum time a borrower must hold mortgage insurance and rescinded the automatic cancellation of annual MIP.
FHA was a critical player during the housing bust, increasing eligible loan amounts to take the slack left by private mortgage insurance providers (PMI) that tightened guidelines so much they became unreliable for borrowers with less than 20% down. But lending during the bust, while helpful in preventing an even worse economic outcome, left the FHA short on reserves.
By 2010, the FHA's Mutual Mortgage Insurance (MMI) account had dropped below $2 for every $100 insured, which was a violation of the agency's congressional mandate. Through 2011, the losses continued and in 2012 the FHA showed a negative $1.44 for every $100 insured.
For this reason they are increased mortgage insurance fees April 1st and the length of time a borrower must pay them on June 3rd.
While this up-trend has been going on since 2010, when the annual premium was .55% to.6% of the loan amount, paid monthly. Compare that to the latest change with rate ranges up to 1.3% to 1.55%. In other words, on a 10% down scenario for a $500,000 loan today, the monthly mortgage insurance has increased to $542.
Going forward, on and after June 3, 2013, the FHA removed the exemption from annual MIP for loans with terms of 15 years or less and LTVs of less than or equal to 78% at origination. For everyone else with a LTV greater than 90%, including those making a 3.5% down payment, the FHA will assess MIP for the duration of the loan’s term, or the first 30 years of the term, whichever comes first.
For streamline refinances without appraisals, FHA uses the original appraised value of the property to calculate the LTV.
These new rules give the FHA more padding, but they remove the option and incentive for a borrower to pay extra to eliminate the mortgage insurance sooner.
Prior to this, if a borrower paid their normal mortgage payment (without making any extra principal payments), they would be able to eliminate their mortgage insurance in about 6 years—and if they wanted to do it more aggressively they could pay a bit extra to knock it out in 5 years.
With these new rates and terms, we may see the pendulum swing away from FHA and back toward private mortgage insurance (PMI) providers. The PMI companies have eased approval guidelines a bit as the recovery trudges on, and their fees are definitely less, with rates ranging from .64% to 1.02% depending on credit score (or $267/mo compared to $425 on that same $500,000 loan example used above). But their approval guidelines are more stringent than FHA.
So from here out borrowers will need to look at both options.